<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C> <C>
Date of Report (Date of earliest event reported) AUGUST 25, 1998 (JUNE 11, 1998)
-------------------------------
ULTRATECH STEPPER, INC.
- ---------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
DELAWARE 0-22248 94-3169580
- ---------------------------------------------------------------------------------
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3050 ZANKER ROAD, SAN JOSE, CALIFORNIA 95134
- ---------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 321-8835
-----------------------------
NOT APPLICABLE
- ---------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
</TABLE>
<PAGE>
AMENDMENT NO. 1
On June 26, 1998, Ultratech Stepper, Inc., a Delaware corporation
(the "Company") filed a Form 8-K reporting its purchase of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc., a Delaware corporation ("ISI") and its wholly owned
subsidiary, Integrated Acquisition Sub, Inc., a Delaware corporation (the
"Acquisition"). In accordance with Item 7 of Form 8-K, the Company is now
filing, within 60 days of the filing of the initial Form 8-K reporting the
Acquisition, financial statements of ISI and its subsidiaries as well as pro
forma financial information giving effect to the Acquisition.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS: The following financial statements
and pro forma financial information are filed as a part of this
report.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Integrated Solutions,
Inc. and subsidiaries (on a consolidated basis).
(1) Independent Auditors' Report (KPMG Peat Marwick LLP);
(2) Consolidated Balance Sheets for the fiscal years ended March 28,
1998, March 29, 1997 and March 30, 1996;
(3) Consolidated Statements of Income for the fiscal years ended
March 28, 1998, March 29, 1997 and March 30, 1996;
(4) Consolidated Statements of Stockholders' Equity (Deficit) for
the fiscal years ended March 28, 1998, March 29, 1997 and
March 30, 1996;
(5) Consolidated Statements of Cash Flows for the fiscal years ended
March 28, 1998, March 29, 1997 and March 30, 1996; and
(6) Notes to Consolidated Financial Statements for the fiscal years
ended March 28, 1998, March 29, 1997 and March 30, 1996.
(b) PRO FORMA FINANCIAL INFORMATION. Ultratech Stepper, Inc. and
Integrated Solutions, Inc. and subsidiaries (on a consolidated basis).
(1) Pro forma Condensed Combined Statement of Operations for the
six months ended July 4, 1998 (unaudited);
(2) Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended July 4, 1998;
2
<PAGE>
(3) Pro forma Condensed Combined Statement of Operations for the
fiscal year ended December 31, 1997 (unaudited);
(4) Notes to Unaudited Pro Forma Condensed Statement of
Operations for the fiscal year ended December 31, 1997; and
(5) Unaudited Condensed Consolidated Balance Sheets for the six
months ended July 4, 1998 and for the fiscal year ended December
31, 1997 (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the three months ended July 4, 1998 filed
with the Securities and Exchange Commission on August 14, 1998).
(c) EXHIBITS. The following documents are filed as exhibits to this
report:
1. Exhibit 7(c)(23.1) - Consent of KPMG Peat Marwick LLP.
2. Exhibit 7(c)(99.1) - Financial Statements of Business Acquired,
Integrated Solutions, Inc. and subsidiaries.
A. Independent Auditors' Report (KPMG Peat Marwick LLP);
B. Consolidated Balance Sheets for the fiscal years ended March
28, 1998, March 29, 1997 and March 30, 1996;
C. Consolidated Statements of Income for the fiscal years ended
March 28, 1998, March 29, 1997 and March 30, 1996;
D. Consolidated Statements of Stockholders' Equity (Deficit) for
the fiscal years ended March 28, 1998, March 29, 1997 and
March 30, 1996;
E. Consolidated Statements of Cash Flows for the fiscal years
ended March 28, 1998, March 29, 1997 and March 30, 1996; and
F. Notes to Consolidated Financial Statements for the fiscal
years ended March 28, 1998, March 29, 1997 and March 30, 1996.
3. Exhibit 7(c)(99.2) - Pro Forma Financial Information, Ultratech
Stepper, Inc. and Integrated Solutions, Inc. and subsidiaries (on a
consolidated basis).
A. Pro forma Condensed Combined Statement of Operations
for the six months ended July 4, 1998 (unaudited);
3
<PAGE>
B. Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended July 4, 1998;
C. Pro forma Condensed Combined Statement of Operations for the
fiscal year ended December 31, 1997 (unaudited);
D. Notes to Unaudited Pro Forma Condensed Statement of Operations
for the fiscal year ended December 31, 1997; and
E. Unaudited Condensed Consolidated Balance Sheets for the six
months ended July 4, 1998 and for the fiscal year ended
December 31, 1997 (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the three months ended
July 4, 1998 filed with the Securities and Exchange
Commission on August 14, 1998).
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
ULTRATECH STEPPER, INC.
(Registrant)
Date: August 25, 1998 By: /s/ William G. Leunis, III
--------------------------------
Name: William G. Leunis, III
Title: Senior Vice President Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit Number
- ------- ------
<S> <C> <C>
23.1 CONSENT OF KPMG PEAT MARWICK LLP........................................................................1
99.1 FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Integrated Solutions, Inc.
and subsidiaries (on a consolidated basis).
(1) Independent Auditors' Report (KPMG Peat Marwick LLP);.........................................2
(2) Consolidated Balance Sheets for the fiscal years ended March 28, 1998,
March 29, 1997 and March 30, 1996;............................................................3
(3) Consolidated Statements of Income for the fiscal years ended March 28, 1998,
March 29, 1997 and March 30, 1996;............................................................5
(4) Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended
March 28, 1998, March 29, 1997 and March 30, 1996; ...........................................6
(5) Consolidated Statements of Cash Flows for the fiscal years ended March 28, 1998,
March 29, 1997 and March 30, 1996; and........................................................7
(6) Notes to Consolidated Financial Statements for the fiscal years ended March 28, 1998,
March 29, 1997 and March 30, 1996.............................................................9
</TABLE>
99.2 PRO FORMA FINANCIAL INFORMATION. Ultratech Stepper, Inc. and
Integrated Solutions, Inc. and subsidiaries (on a consolidated basis).
<TABLE>
<S> <C> <C>
(1) Pro forma Condensed Combined Statement of Operations for the
six months ended July 4, 1998 (unaudited);..................................................26
(2) Notes to Unaudited Pro Forma Condensed Combined Statement of Operations for the six months
ended July 4, 1998;..........................................................................27
(3) Pro forma Condensed Combined Statement of Operations for the fiscal year ended
December 31, 1997 (unaudited); and...........................................................28
(4) Notes to Unaudited Pro Forma Condensed Statement of Operations for the fiscal year ended
December 31, 1997............................................................................29
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
Integrated Solutions, Inc.:
We consent to the incorporation by reference in the registration statements
(No.'s 33-70790, 33-92572, 333-06301, 333-33197, 333-51117) on Form S-8 of
Ultratech Stepper, Inc. of our report dated May 15, 1998 except for note 20,
as to which the date is May 19, 1998 with respect to the consolidated balance
sheets of Integrated Solutions, Inc. and Subsidiaries as of March 28, 1998,
March 29, 1997 and March 30, 1996 and the related consolidated statements of
income, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended March 28, 1998 which report appears in the
Form 8-K/A of Ultratech Stepper, Inc. dated August 25, 1998.
Our report dated May 15, 1998 except for note 20, as to which the date is May
19, 1998, contains an explanatory paragraph that states that the Company has
suffered a significant net loss in fiscal year 1998, is currently in default of
its debt covenants, and has missed its scheduled interest payments on its
subordinated debt. These matters raise substantial doubt about the Company's
ability to continue as a going concern.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
August 24, 1998
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Integrated Solutions, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Integrated
Solutions, Inc. and subsidiaries as of March 28, 1998, March 29, 1997 and
March 30, 1996, and the related consolidated statements of income,
stockholders' equity (deficit), and cash flows for each of the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Integrated Solutions, Inc. and subsidiaries as of March 28, 1998, March 29,
1997 and March 30, 1996, and the results of their operations and their cash
flows for each of the years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 18 to the
financial statements, the Company experienced a significant net loss in
fiscal year 1998, is currently in default of its debt covenants, and has
missed its scheduled interest payments on its subordinated debt. These
matters raise substantial doubt about the Company's ability to continue as a
going concern.
/s/ KPMG Peat Marwick LLP
May 15, 1998
except for note 20,
as to which the date
is May 19, 1998
2
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 28, 1998, March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
ASSETS 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,882,492 174,901 147,379
Note receivable (note 14) 725,586 1,148,441 -
Accounts receivable, net of allowance for
doubtful accounts of $476,291 in 1998,
$108,392 in 1997 and $93,965 in 1996 6,066,945 12,221,715 17,844,474
Inventories (note 5) 14,360,991 42,693,678 26,681,930
Taxes receivable 3,853,605 1,038,787 280,282
Deferred tax asset (note 9) 308,960 1,714,942 1,241,862
Prepaid expenses and other current assets 1,683,896 2,567,106 2,744,705
----------------- ----------------- -----------------
Total current assets 28,882,475 61,559,570 48,940,632
----------------- ----------------- -----------------
Property and equipment (note 6) 14,133,225 13,652,983 8,437,059
Less accumulated depreciation (4,017,647) (1,994,403) (974,244)
----------------- ----------------- -----------------
Net property and equipment 10,115,578 11,658,580 7,462,815
----------------- ----------------- -----------------
Other assets:
Certificate of deposit, restricted (note 15) - - 3,000,000
Capitalized software, net (note 2) 26,744 53,490 89,147
Goodwill, net (note 2) 109,796 299,207 488,618
Long-term prepaid royalty fees (note 4) 2,824,931 3,465,246 -
Deferred finance charges 878,957 960,066 -
----------------- ----------------- -----------------
Total other assets 3,840,428 4,778,009 3,577,765
----------------- ----------------- -----------------
$ 42,838,481 77,996,159 59,981,212
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 28, 1998, March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 7) $ 43,217,434 1,214,925 2,268,104
Revolving credit note (note 16) - - 6,482,757
Accounts payable 5,593,588 6,462,023 8,355,404
Accrued warranty and installation costs 1,485,888 1,799,206 1,334,122
Accrued expenses 3,559,151 2,057,075 4,942,900
Advance customer payments 2,641,991 2,199,658 1,233,025
------------------ ----------------- -----------------
Total current liabilities 56,498,052 13,732,887 24,616,312
Long-term debt, less current maturities (note 7) 222,740 40,180,755 11,182,764
Deferred tax liability (note 9) 308,960 426,713 334,658
------------------ ----------------- -----------------
Total liabilities 57,029,752 54,340,355 36,133,734
------------------ ----------------- -----------------
Commitments and contingencies (notes 4, 8, 10 and 13)
Stockholders' (deficit) equity (note 8):
Convertible preferred stock, Series A, non-voting, $.01 par
value; 4,891,000 shares authorized, issued and outstanding
at March 28, 1998, March 29, 1997 and March 30, 1996;
preference of liquidation of $15,337,497 48,910 48,910 48,910
Common stock, $.001 par value; 35,000,000,
35,000,000 and 30,000,000 shares authorized at March 28,
1998, March 29, 1997, and March 30, 1996, respectively;
20,056,450, 20,056,350 and 20,036,350 shares issued at
March 28, 1998, March 29, 1997 and March 30, 1996,
respectively; 18,667,348, 18,667,248 and 19,447,248 shares
outstanding at March 28, 1998, March 29, 1997 and March 30,
1996, respectively; 14,851,382, 12,927,382 and 9,391,019
shares reserved at March 28, 1998, March 29, 1997 and March
30, 1996, respectively 20,056 20,056 20,036
Additional paid-in capital 14,870,111 14,870,027 14,849,070
Cumulative translation adjustment (62,787) (16,108) 3,586
(Accumulated deficit) retained earnings (27,863,061) 9,937,419 9,907,438
------------------ ----------------- -----------------
(12,986,771) 24,860,304 24,829,040
Less: Treasury stock, 1,389,102, 1,389,102 and
589,102 common shares at March 28, 1998
March 29, 1997 and March 30, 1996, at cost (1,204,500) (1,204,500) (981,562)
------------------ ----------------- -----------------
Total stockholders' (deficit) equity (14,191,271) 23,655,804 23,847,478
------------------ ----------------- -----------------
$ 42,838,481 77,996,159 59,981,212
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended March 28, 1998, March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues (note 12 and 17) $ 40,176,141 53,063,377 50,100,980
Cost of goods sold (note 12 and 17) 35,024,515 35,749,182 33,978,877
------------------ --------------- ---------------
Gross profit 5,151,626 17,314,195 16,122,103
Expenses:
Royalty (note 4) 640,315 794,220 433,043
Sales and marketing (note 17) 2,787,379 3,561,712 5,290,783
Research and development 5,916,669 4,547,725 3,553,149
General and administrative 3,475,093 2,445,829 3,629,795
Restructuring charges (note 19) 11,132,587 - -
------------------ --------------- ---------------
Operating (loss) income (18,800,417) 5,964,709 3,215,333
------------------ --------------- ---------------
Other (expense) income:
Interest expense (3,282,662) (1,702,465) (1,140,913)
Gain on sale of business (note 14) - 728,632 -
Miscellaneous, net (82,452) 16,644 26,581
------------------ --------------- ---------------
Total other expense (3,365,114) (957,189) (1,114,332)
------------------ --------------- ---------------
(Loss) income from
continuing operations
before income taxes (22,165,531) 5,007,520 2,101,001
Income tax benefit (expense) (note 9) 2,753,229 (19,943) (854,282)
------------------ --------------- ---------------
(Loss) income from continuing operations (19,412,302) 4,987,577 1,246,719
------------------ --------------- ---------------
Discontinued operations (note 3):
(Loss) income from operations of
Captis Division (net of income tax
expense of $0 in 1998 and 1997
and $1,375,350 in 1996) (1,677,677) (4,957,596) 2,007,152
Loss on disposal of Captis Division (16,710,501) - -
------------------ --------------- ---------------
(Loss) income from
discontinued operations (18,388,178) (4,957,596) 2,007,152
------------------ --------------- ---------------
Net (loss) income $ (37,800,480) 29,981 3,253,871
------------------ --------------- ---------------
------------------ --------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the years ended March 28, 1998, March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
Retained
Additional Cumulative earnings Total
Preferred Common paid-in translation (accumulated Treasury stockholders'
stock stock capital adjustment deficit) stock equity (deficit)
-------- -------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1995 $ - 20,015 1,007,485 4,750 6,653,567 (10) 7,685,807
Issuance of preferred stock 48,910 - 13,831,058 - - - 13,879,968
Treasury stock - - - - - (981,552) (981,552)
Exercise of stock options - 21 10,527 - - - 10,548
Net income for year ended
March 30, 1996 - - - - 3,253,871 - 3,253,871
Translation adjustment - - - (1,164) - - (1,164)
-------- -------- ------------ --------- ------------ ------------ ------------
Balance, March 30, 1996 48,910 20,036 14,849,070 3,586 9,907,438 (981,562) 23,847,478
Treasury stock - - - - - (222,938) (222,938)
Exercise of stock options - 20 20,957 - - - 20,977
Net income for year ended
March 29, 1997 - - - - 29,981 - 29,981
Translation adjustment - - - (19,694) - - (19,694)
-------- -------- ------------ --------- ------------ ------------ ------------
Balance, March 29, 1997 48,910 20,056 14,870,027 (16,108) 9,937,419 (1,204,500) 23,655,804
Exercise of stock options - - 84 - - - 84
Net loss for year ended
March 28, 1998 - - - - (37,800,480) - (37,800,480)
Translation adjustment - - - (46,679) - - (46,679)
-------- -------- ------------ --------- ------------ ------------ ------------
Balance, March 28, 1998 $ 48,910 20,056 14,870,111 (62,787) (27,863,061) (1,204,500) (14,191,271)
-------- -------- ------------ --------- ------------ ------------ ------------
-------- -------- ------------ --------- ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended March 28, 1998, March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (37,800,480) 29,981 3,253,871
------------------ ------------------ ------------------
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 2,123,202 1,055,816 693,648
Amortization of prepaid royalty 640,315 746,221 -
Amortization of goodwill 189,411 189,411 189,411
Amortization of deferred financing charges 81,109 - -
Deferred taxes 1,288,229 (381,025) (659,326)
Allowance for doubtful accounts 367,899 14,427 (25,661)
Changes in current assets and liabilities:
Accounts and note receivable 6,209,726 4,459,891 (8,563,532)
Inventories 28,259,475 (18,197,843) (12,136,376)
Taxes receivable (2,814,818) (758,505) (236,754)
Prepaid and other assets 883,210 177,599 (1,992,088)
Accounts payable (868,435) (1,893,381) 5,821,969
Accrued expenses 1,502,076 (2,885,825) 1,359,658
Accrued warranty and installation costs (313,318) 465,084 (54,898)
Advance customer payments 442,333 966,633 35,114
------------------ ------------------ ------------------
Total adjustments 37,990,414 (16,041,497) (15,568,835)
------------------ ------------------ ------------------
Net cash provided (used) by
operating activities 189,934 (16,011,516) (12,314,964)
------------------ ------------------ ------------------
Cash flows used in investing activities:
Expenditures for property and equipment (480,242) (3,029,829) (5,914,765)
Sale (purchase) of certificate of deposit - 3,000,000 (3,000,000)
Prepaid royalty - (4,211,467) -
------------------ ------------------ ------------------
Net cash used in investing
activities (480,242) (4,241,296) (8,914,765)
------------------ ------------------ ------------------
Cash flows from financing activities:
Exercise of stock options 84 20,977 10,548
Deferred finance charges - (960,066) -
Purchase of treasury stock - (198) (981,552)
Issuance of preferred stock - - 13,879,968
Net proceeds from issuance of debt 2,044,494 28,777,905 14,682,753
Principal payments on debt - (7,538,590) (6,670,000)
------------------ ------------------ ------------------
Net cash provided by financing
activities 2,044,578 20,300,028 20,921,717
------------------ ------------------ ------------------
Effect of exchange rate changes on cash (46,679) (19,694) (1,164)
------------------ ------------------ ------------------
Net (decrease) increase in cash and cash equivalents 1,707,591 27,522 (309,176)
Cash and cash equivalents at beginning of period 174,901 147,379 456,555
------------------ ------------------ ------------------
Cash and cash equivalents at end of period $ 1,882,492 174,901 147,379
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
(Continued)
7
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows, Continued
For the years ended March 28, 1998, March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,036,178 2,882,000 1,201,675
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Income taxes $ - 1,156,710 1,997,696
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Supplemental non-cash disclosure:
Purchase of treasury stock in exchange for issuance
of note payable $ - 222,740 -
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Inventory capitalized as equipment $ 73,212 2,186,095 -
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 28, 1998, March 29, 1997 and March 30, 1996
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Solutions, Inc. (the "Company") manufactures, sells and
services lithography equipment, used for the production of integrated
circuits, to the semiconductor industry. Current business activity in
optical lithography includes design, manufacture, sales and service for
reduction wafer steppers, resist coat/developer systems and large area
substrate equipment. The Company is also a supplier of capital equipment
to the microelectronics packaging industry.
The Company was formed to purchase the assets primarily used in, or
dedicated to, the semiconductor capital equipment service, product
upgrades and refurbishment division of the GCA Division of General
Signal Technology Corporation ("GST"), a wholly owned subsidiary of
General Signal Corporation ("GSX"). This transaction occurred on August
27, 1993.
Consideration for assets acquired with a fair value of $13,316,758 less
liabilities assumed of $2,239,367 was $911,465 in cash and $11,420,000
of long-term obligations. As of April 1, 1995, the long-term obligations
consisted partly of a promissory note to GSX in the amount of
$5,820,000. The remaining balance of $5,600,000 represented the
estimated minimum payment due to GSX as part of an earn-out clause
contained in the acquisition agreement which the Company had the option
to prepay during the first year of operation and elected to do so. As a
result of the prepayment of the earnout, long-term debt and goodwill
were reduced by approximately $599,000. Expenses related to the
acquisition amounted to $299,451. The excess of cost over fair value of
net assets acquired in the amount of $1,553,525 has been recorded as
goodwill. As of March 30, 1996, all long term obligations to GSX have
been satisfied.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
INVENTORIES
Inventories consist primarily of equipment and parts stated at the lower
of cost or market. Cost is determined on an average cost basis.
ADVERTISING COSTS
Costs incurred for producing and communicating advertising are generally
expensed when incurred.
9
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method. Leasehold improvements are amortized
over the lesser of the remaining term of the lease, or a ten year
period. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
CAPITALIZED SOFTWARE
The Company capitalizes software costs beginning when technological
feasibility is established and concluding when the product is ready for
general release. Research and development costs related to software
development are expensed as incurred. Capitalized software costs are
depreciated using the straight-line method over a period of three years
or the expected life of the product whichever is less. Depreciation
expense was $26,746, $35,657 and $44,573 for the years ended March 28,
1998, March 29, 1997 and March 30, 1996, respectively.
GOODWILL
The excess of cost arising from acquisitions over the fair value of
assets acquired is being amortized on a straight-line basis over five
years. Accumulated amortization of goodwill totaled $987,052, $797,641
and $608,230 at March 28, 1998, March 29, 1997, and March 30, 1996,
respectively (see notes 1 and 4).
REVENUE RECOGNITION
Substantially all revenues are recognized when finished products are
shipped to customers or services have been rendered. Shipment to
customers occurs upon receipt of a valid purchase order containing
standard terms.
PRODUCT WARRANTY AND INSTALLATION COSTS
Estimated product warranty and installation costs related to product
sales are provided at the time of sale. Actual expenditures are charged
against the warranty or installation reserves as incurred.
10
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue applying the method
prescribed in APB Opinion No. 25. Refer to Note 8.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at rates of exchange rates in effect at the balance sheet date
and income statement items are translated at the average exchange rates
prevailing during the year. Resulting translation adjustments are
recorded as a separate component of stockholders' equity. Foreign
exchange gains and losses are included in the consolidated statements of
income during the year they occur.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at March 28, 1998,
March 29, 1997 and March 30, 1996 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATION
Certain 1996 and 1997 balances have been reclassified to conform with
1997 and 1998 financial statement presentation.
11
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, the Company
considers all unrestricted, highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
DEFERRED FINANCE CHARGES
The Company capitalized origination fees associated with the
subordinated note payable as described in note 7(d). The fees are being
amortized over the life of the loan on a straight line basis.
ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS
For the year ended March 28, 1998, interest expense was allocated to the
discontinued operation based on the division's total assets as a
percentage of consolidated total assets. For the years ended March 29,
1997 and March 30, 1996, interest expense for the discontinued operation
was directly associated with debt used to finance the discontinued
operation. Interest expense for the discontinued operation was
$1,605,422, $1,014,925 and $163,348 for the years ended March 29, 1998,
March 27, 1997 and March 30, 1996, respectively.
(3) DISCONTINUED OPERATIONS
On July 31, 1997, the Company adopted a plan to discontinue the Captis
Used Equipment business. The Company sold the majority of the assets of
the business, which consisted primarily of inventory, on December 9,
1997 for $2,600,000. The remaining net assets of $1,815,605 at March 28,
1998 consist of outstanding receivables, property, plant and equipment,
and other current liabilities which are included in the accompanying
consolidated balance sheet at their net realizable value.
The loss on the disposal of the discontinued operations of $16,710,501,
consists of a loss from the asset sale of $7,567,653 and operating
losses of $9,142,848 from July 31, 1997 to December 9, 1997.
Operating results of the Captis Used Equipment business for the four
months ended July 31, 1997 and the 12 months ended March 30, 1996 are
shown separately in the accompanying income statements. The income
statements for the years ended March 29, 1997 and March 30, 1996 have
been restated, and operating results of the Captis Used Equipment
business were reclassified to reflect the discontinued operation in
accordance with generally accepted accounting principles.
12
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
Net sales of the Captis Used Equipment business as of March 28, 1998,
March 29, 1997 and March 30, 1996 were $9,623,424, $27,000,908 and
$26,620,508, respectively. These amounts are not included in net sales
in the accompanying consolidated income statements.
(4) ACQUISITIONS
During September 1994, the Company acquired the XLS Stepper Technology
rights and associated assets and liabilities from General Signal
Corporation (GSX). The XLS family of i-line and Deep-UV wafer steppers
was developed by GCA (a former unit of GSX), to provide semiconductor
manufacturers with leading edge U.S. lithography tools. As of March 28,
1998 there is an outstanding warrant to purchase 2,000,000 shares of the
Company's common stock as a result of this acquisition.
The XLS acquisition agreement also provides for the Company to make
royalty payments to GSX on all XLS product sales. Royalties range from
two to ten percent and remain in effect until the earlier of (a) ten
years, (b) a payment of an aggregate of $20 million, or, (c) a payment
of the present value (using an 8% discount factor) of $2 million for
each of the remaining years of the agreement, at which time the license
granted to the Company shall be considered to be fully paid and
irrevocable. Upon reaching aggregate royalties paid of $5,000,000, the
Company will obtain marketing rights for the XLS technology. As of July
1996, the Company prepaid royalty fees of $4,211,467 in order to reach
the $5,000,000 royalty milestone. The prepaid royalty fees are expensed
upon the sale of XLS equipment. $640,315 and $746,221 of the prepaid
royalty fees were expensed during the years ended March 28, 1998 and
March 29, 1997, respectively.
(5) INVENTORIES
Inventories at March 28, 1998, March 29, 1997 and March 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Raw materials $ 2,939,591 19,240,200 10,693,132
Work-in-process 2,573,100 6,277,544 4,855,633
Finished goods 8,848,300 17,175,934 11,133,165
---------------- ----------------- -----------------
$ 14,360,991 42,693,678 26,681,930
---------------- ----------------- -----------------
---------------- ----------------- -----------------
</TABLE>
The Company purchases common inventory for manufacturing, repair and
spare parts utilization. As a result, common inventory is included in
both raw materials and finished goods depending on its ultimate intended
use.
13
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment at March 28, 1998, March 29, 1997
and March 30, 1996 follows:
<TABLE>
<CAPTION>
Estimated
1998 1997 1996 useful lives
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Research and development
equipment $ 2,835,306 2,592,547 1,603,133 5 years
Computer equipment,
furniture and fixtures 3,793,018 3,822,004 2,688,947 5 years
Machinery and equipment 5,288,207 5,053,692 1,681,426 5 years
Leasehold improvements 2,216,694 2,184,740 2,463,553 10 years
---------------- ----------------- ---------------
$ 14,133,225 13,652,983 8,437,059
---------------- ----------------- ---------------
---------------- ----------------- ---------------
</TABLE>
(7) LONG-TERM DEBT
Debt at March 28, 1998, March 29, 1997 and March 30, 1996, consisted of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Note payable - bank (a) $ 16,369,889 14,597,692 3,849,170
Note payable - banks (b) 4,711,667 4,711,667 5,767,500
Capital lease obligations (c) 7,135,878 6,863,581 3,834,198
Subordinated note payable (d) 15,000,000 15,000,000 -
Note payable - other (e) 222,740 222,740 -
----------------- ----------------- -----------------
43,440,174 41,395,680 13,450,868
Less current maturities 43,217,434 1,214,925 2,268,104
----------------- ----------------- -----------------
$ 222,740 40,180,755 11,182,764
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
(a) The Company has an $18 million revolving line of credit with a
bank which, as amended in December 1997, is secured by all the
assets of the Company and bears interest at the bank's base
lending rate (11%, 8.75% and 8.25% at March 28, 1998, March 29,
1997 and March 30, 1996, respectively), plus: 2% on the first
$15 million of borrowings, and .25% in excess of $15 million.
Available borrowings under the agreement as of March 28, 1998,
March 29, 1997 and March 30, 1996 total $17,480,634, $26,029,292
and $9,000,000, respectively, of which $16,369,889, $14,597,692
and $3,849,170 was utilized as of March 28, 1998, March 29, 1997
and March 30, 1996, respectively. The terms of the agreement
require the Company to meet certain minimum levels of operating
profit, minimum fixed charge coverage ratio, maximum ratio of
debt to tangible net worth and maximum capital expenditures,
amongst other requirements.
14
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7), CONTINUED
(b) Notes payable to two banks, as amended in December 1996, secured
by the assets of the Company, bearing interest at the bank's
base rate plus .5% (9.0%, 9.0% and 8.75% at March 28, 1998,
March 29, 1997 and March 30, 1996). The notes were scheduled to
be repaid in monthly installments of $117,792 plus interest
until maturity at December 31, 2002. One year of monthly
installments were prepaid as of March 29, 1997. Only interest
payments on the loan have been made from March 29, 1997 to March
28, 1998. The terms of the agreement require the Company to meet
certain minimum levels of operating profit, minimum fixed charge
coverage ratio, maximum ratio of debt to tangible net worth and
maximum capital expenditures, amongst other requirements.
(c) The Company has a financing arrangement available for use in
capital expansion, with a limit of $12,500,000 for fiscal year
1998, $10,000,000 for fiscal year 1997, and $5,000,000 for
fiscal year 1996, bearing interest at rates between 8.41% and
8.91%, due in installments through March 2002.
The bank loans (a), (b) and (c) (the "Bank Facility") dated June
24, 1996, as amended, provided for the maintenance of certain
financial covenants for which the company was non-compliant with
as of March 28, 1998. A Forbearance Agreement dated March 18,
1998 between the Company and the Bank expressly provides that
the existing defaults on the Bank Facility have not been waived
and that upon the expiration of the Forbearance Agreement, the
Bank may pursue their remedies under the Bank Facility. The
termination date was April 15, 1998 and was subsequently
extended to June 1, 1998. Accordingly, the entire amount under
the Bank Facility has been classified as a current liability as
of March 28, 1998.
(d) The note bears interest at the annual rate of 11.5%, payable
semi-annually beginning October 1, 1997. The note is to be
repaid in two installments of $7,500,000 on March 28, 2006 and
2007. The note may be repaid earlier, subject to certain
prepayment premiums. The terms of the agreement require the
Company to meet certain minimum levels of operating profit,
minimum fixed charge coverage ratio, maximum leverage ratio and
maximum capital expenditures, amongst other requirements. At
March 28, 1998, the Company is in default of certain financial
covenants and its semi-annual interest payment due October 1,
1997. Accordingly, the entire amount of the note has been
classified as a current liability as of March 28, 1998. This
debt is subordinate to the bank debt described under (a) and (b)
above.
(e) The uncollateralized note payable bears interest at 8.5% and
matures in full in March 2002.
15
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7), CONTINUED
Scheduled principal payments of long-term debt for the next four fiscal
years and thereafter as of March 28, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 43,217,434
2000 -
2001 -
2002 222,740
Thereafter -
-----------------
$ 43,440,174
-----------------
-----------------
</TABLE>
(8) CAPITAL STOCK AND OPTIONS
In August of 1993, the shareholders approved a 1993 Stock Option Plan
which provided for the granting of up to 3,000,000 stock options and
incentive stock options to key employees. The stockholders authorized an
additional 3,000,000 options for granting on May 15, 1998. Stock options
are exercisable over a period determined by the board of directors, but
no later than ten years after the grant date.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(000's) price (000's) price (000's) price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,866 $1.01 2,500 $ .67 1,904 $ .57
Granted 2,957 .60 773 2.00 672 .97
Exercised - - 20 .58 21 .50
Forfeited 1,033 .82 387 .84 55 .57
--------- --------- ---------
Outstanding at end of year 4,790 .76 2,866 1.01 2,500 .67
--------- --------- ---------
--------- --------- ---------
Options exercisable at year end 1,457 1,809 1,760
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of
options granted during year .60 2.00 .97
--------- --------- ---------
--------- --------- ---------
</TABLE>
16
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8), CONTINUED
The Company applies Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock compensation plan.
Accordingly, no compensation has been recognized for its stock option
plan. Since the Company accounts for the compensation plan under APB 25,
certain pro forma information regarding net income is required by
Statement of Financial Accounting Standards Board No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION (FASB 123) as if the Company had accounted
for its compensation plans under the fair value approach of this
statement. For the purposes of the pro forma disclosures, the estimated
fair value of the compensation plan is amortized to expense over the
plan's vesting period. The Company's pro forma net (loss) income for the
years ended March 28, 1998, March 29, 1997 and March 30, 1996 is
($37,800,480), ($170,985) and $3,199,589, respectively.
The fair value of the Company's stock option plan was estimated at the
grant date using a minimum value pricing model. The estimated weighted
average assumptions under that model for the years ended March 28, 1998,
March 29, 1997 and March 30, 1996 were: zero future dividend yield and
risk free interest rate of 6.98%, based on an eight-year strip yield of
U.S. Treasury Securities at March 29, 1997. It was also assumed that the
stock options have a weighted average expected life of eight years and
that the value of a stock option has a fair value of $.01 at March 28,
1998.
At March 28, 1998 and March 29, 1997, there were warrants outstanding
allowing the holders, Citicorp Mezzanine Partners, L.P. and GSX, to
purchase 3,170,363 and 2,000,000 shares, respectively, of the Company's
common stock at $3.067 and $.0133 per share, respectively. At March 30,
1996, there were warrants outstanding allowing the holder, GSX, to
purchase 2,000,000 shares of the Company's common stock at $0.133 per
share.
As of March 28, 1998, March 29, 1997 and March 30, 1996, the Company has
reserved the following number of shares of common stock:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reserved for issuance upon conversion of
preferred stock 4,891,019 4,891,019 4,891,019
Reserved for issuance upon exercise of
options granted 4,790,000 2,866,000 2,500,000
Reserved for issuance upon exercise of
warrants outstanding 5,170,363 5,170,363 2,000,000
---------------- ----------------- ----------------
Total shares of
common stock reserved 14,851,382 12,927,382 9,391,019
---------------- ----------------- ----------------
---------------- ----------------- ----------------
</TABLE>
17
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) INCOME TAXES
Income tax expense (benefit) for the years ended March 28, 1998, March
29, 1997 and March 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
Year ended
March 28, 1998 Federal State Foreign Total
-------------- ------- ----- ------- -----
<S> <C> <C> <C> <C>
Current $ (4,129,355) 231,635 98,161 (3,799,559)
Deferred 1,046,330 - - 1,046,330
---------------- ------------ ---------- ----------------
Total $ (3,083,025) 231,635 98,161 (2,753,229)
---------------- ------------ ---------- ----------------
---------------- ------------ ---------- ----------------
Year ended
March 29, 1997 Federal State Foreign Total
-------------- ------- ----- ------- -----
Current $ 199,201 48,986 152,781 400,968
Deferred (303,560) (67,203) (10,262) (381,025)
---------------- ------------ ---------- ----------------
Total $ (104,359) (18,217) 142,519 19,943
---------------- ------------ ---------- ----------------
---------------- ------------ ---------- ----------------
Year ended
March 30, 1996 Federal State Foreign Total
-------------- ------- ----- ------- -----
Current $ 2,351,790 500,281 36,887 2,888,958
Deferred (539,821) (119,505) - (659,326)
---------------- ------------ ---------- ----------------
---------------- ------------ ---------- ----------------
Total $ 1,811,969 380,776 36,887 2,229,632
---------------- ------------ ---------- ----------------
---------------- ------------ ---------- ----------------
</TABLE>
Income tax expense (benefit) for the years ended March 28, 1998, March
29, 1997 and March 30, 1996 differs from the computed expected income
tax expense determined by applying the statutory federal income tax rate
of 34% to pretax income as a result of the following:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax (benefit) expense $ (13,733,537) 16,974 1,864,391
State income tax expense, net of federal
income tax 152,879 (12,023) 328,354
Foreign income tax rate differential 62,936 22,460 36,887
Other (284,690) (7,468) -
Change in federal valuation allowance 11,049,183 - -
------------------ ----------- --------------
$ (2,753,229) 19,943 2,229,632
------------------ ----------- --------------
------------------ ----------- --------------
</TABLE>
18
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at March 28, 1998,
March 29, 1997 and March 30, 1996 are presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------- ------------------------------ ------------------------------
Current Noncurrent Total Current Noncurrent Total Current Noncurrent Total
------- ---------- ----- ------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Miscellaneous expenses,
principally due to accrual
for financial reporting
purposes $ 7,074,782 13,417 7,088,199 1,671,628 4,587 1,676,215 1,213,899 - 1,213,899
NOL carryforward 4,936,404 - 4,936,404 - - - - - -
Inventory capitalization 62,636 - 62,636 54,036 - 54,036 37,962 - 37,962
Unrealized foreign translation - - - 10,262 - 10,262 - - -
Valuation allowance (11,761,402) (13,417) (11,774,819) - - - - - -
----------- -------- ----------- --------- -------- --------- --------- -------- ---------
Total deferred tax 312,420 - 312,420 1,735,926 4,587 1,740,513 1,251,861 - 1,251,861
assets ----------- -------- ----------- --------- -------- --------- --------- -------- ---------
Deferred tax liabilities:
Accelerated tax depreciation - 247,168 247,168 - 350,432 350,432 - 205,258 205,258
Purchase price accounting
differences - 61,792 61,792 - 80,868 80,868 - 129,400 129,400
Prepaid expenses 3,460 - 3,460 20,984 - 20,984 9,999 - 9,999
----------- -------- ----------- --------- -------- --------- --------- -------- ---------
Total deferred tax
liabilities 3,460 308,960 312,420 20,984 431,300 452,284 9,999 334,658 344,657
----------- -------- ----------- --------- -------- --------- --------- -------- ---------
Net deferred tax asset
(liability) $ 308,960 (308,960) - 1,714,942 (426,713) 1,288,229 1,241,862 (334,658) 907,204
----------- -------- ----------- --------- -------- --------- --------- -------- ---------
----------- -------- ----------- --------- -------- --------- --------- -------- ---------
</TABLE>
19
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
The Company has not recognized a deferred tax liability of approximately
$161,746, $126,522 and $54,920 for the undistributed earnings of its 100
percent owned foreign subsidiaries as of March 28, 1998, March 29, 1997
and March 30, 1996, respectively, because the Company currently does not
expect those unremitted earnings to be paid to the parent and become
taxable to the Company in the foreseeable future. A deferred tax
liability will be recognized when the Company expects that it will
recover those undistributed earnings in a taxable manner, such as
through receipt of dividends or sale of investments. As of March 28,
1998, March 29, 1997 and March 20, 1996, the undistributed earnings of
these subsidiaries were approximately $475,726, $372,124, and $161,527,
respectively.
At March 28, 1998, the Company has available, subject to restrictions
caused by any subsequent ownership changes, federal net operating loss
carryforwards of approximately $12,800,000. These carryforwards expire
during the year ended March 31, 2013, if not used sooner. Should the
Company undergo an ownership change as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss
carryforwards generated prior to the ownership change will be subject to
an annual limitation which could reduce or defer the utilization of
these losses.
(10) LEASES
The Company leases manufacturing and office space and certain equipment
under operating leases expiring through 2002. Rent expense for the years
ended March 28, 1998, March 29, 1997 and March 30, 1996 was $1,694,264,
$1,466,728 and $1,084,215, respectively. In fiscal year 1998, the
Company began sub-leasing its previously occupied manufacturing and
warehouse space in Austin, Texas which was being used by the Captis
Division. Rental income relating to the sub-leases was $79,031 as of
March 28, 1998.
Total future minimum lease payments under noncancelable operating leases
net of future sub-lease payments are as follows:
<TABLE>
<CAPTION>
Fiscal year ending
March:
------
<S> <C>
1999 $ 613,578
2000 116,629
2001 273,780
2002 443,124
2003 443,124
Thereafter 572,369
------------
$ 2,462,604
------------
------------
</TABLE>
20
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan, adopted on August 27, 1993, which is a
voluntary plan for all covered employees of Integrated Solutions, Inc.
Participants can contribute between one percent and seventeen percent of
their compensation to the Plan, subject to an annual limit. The Company
may elect to offer discretionary matching of participants'
contributions. Total 401(k) Plan expense for the years ended March 28,
1998, March 29, 1997 and March 30, 1996 was $355,382, $345,640 and
$599,628, respectively.
The U.K. subsidiary of the Company maintains a contributory, defined
benefit pension plan for substantially all of its employees and provides
for and funds the related costs computed on an actuarial basis. Past
service costs are amortized over 20 years. Foreign pension plans are not
required to report to certain governmental agencies pursuant to the
Employee Retirement Income Security Act of 1974. However, effective
during 1989, they are required to report under the guidelines of FASB
87. Under U.K. regulations, the Company is required to obtain an
actuarial valuation every three years. The last actuarial valuation was
April 1, 1996. At the date of the actuarial valuation, plan assets at
market value exceeded the accumulated benefit obligation by $521,404.
Contributions and expenses under the plan are in accordance with
estimates recommended by the foreign actuaries and are expected to
approximate the amounts determined in the formal actuarial valuation
report. The Company does not expect to incur any additional liability
due to unfunded amounts.
Amounts charged to operations with respect to this plan for the years
ended March 28, 1998, March 29, 1997 and March 30, 1996 aggregated
approximately $0, $11,500 and $9,000, respectively.
(12) MAJOR CUSTOMERS AND VENDORS
The Company had five customers that accounted for approximately 26%, 32%
and 28% of revenue for the year ended March 28, 1998, March 29, 1997 and
March 30, 1996, respectively. The Company had three vendors that
accounted for approximately 31% of the cost of sales for the three years
ended March 28, 1998, March 29, 1997 and March 30, 1996.
(13) COMMITMENTS
The Company has entered into employment agreements with various key
members of senior management. These agreements include protections of
the Company's confidential information and provisions regarding
termination of employment including, under certain circumstances,
severance payments of up to three years compensation.
21
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) GAIN ON SALE OF BUSINESS
On December 27, 1996, the Company sold certain assets related to resist
coat/develop systems for $600,000. The Company also licensed the limited
right to make, have made, use, sell and import these systems and
products for $500,000. In exchange for the assets and licensing rights,
the Company received a note receivable for $1,100,000, to be paid in
eighteen equal installments of $61,111 plus accrued interest at the rate
of 3% per year compounded monthly, beginning August 1, 1997. As of March
28, 1998, the current note balance including accrued interest was
$725,586. As part of the sale, an agreement not to compete for a five
year period was executed.
(15) CERTIFICATE OF DEPOSIT, RESTRICTED
As noted in the terms of the December 29, 1995 Term Loan Agreement
between the Company and two banking institutions, the $3,000,000 balance
represented a "security instrument" required as collateral for the term
of the loan agreement. This term loan agreement was satisfied in June
1996 and thus there is no longer a requirement for the $3,000,000
security instrument.
(16) REVOLVING CREDIT NOTE
The revolving credit note of $6,482,757 at March 30, 1996 represented
borrowings under a $10,000,000 revolving line of credit with a
commercial finance company, and was secured by certain inventory of a
subsidiary. The note bore interest at LIBOR plus 4% and was due on
February 3, 1997, or earlier if certain conditions were met. The terms
of the agreement required the Company to meet certain minimum levels of
tangible net worth, debt service ratio and ratio of liabilities to
tangible net worth, amongst other requirements. This note was paid in
full during March 1997.
(17) JOINT MARKETING VENTURE
During 1994, the Company and GE Capital Corporation (GECC) formed a
joint marketing venture (Optimiser). The venture provided creative asset
management solutions for semiconductor device manufacturers who had a
need for capital equipment acquisition, disposition or facilities
expansion. The venture was positioned to offer device manufacturers a
more cost effective and productive means of acquiring used or
refurbished equipment and upgrading or disposing of non-productive
assets. No initial cash contributions were required as part of the joint
venture.
22
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17), CONTINUED
In connection with the joint marketing venture, all inventory purchases
were financed by and recorded on the books of GECC. Subsequent to the
purchase and prior to the sale of inventory, title to the goods was
passed to the Company, which in turn recorded the revenue, cost of sales
and sales commissions owed to GECC. Total revenues and cost of sales for
the year ended March 30, 1996 were approximately $26.6 million and $18.9
million, respectively. Commissions paid to GECC, included in sales and
marketing expenses, totaled approximately $2 million for the year ended
March 30, 1996. This joint venture was dissolved in February 1996.
(18) GOING CONCERN ASSUMPTION
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in
Note 7 of the Notes to Consolidated Financial Statements, the Company is
in default of certain financial covenants. In addition, advances under
the Revolving Line of Credit exceeded the Borrowing Base by $3,944,921
on March 28, 1998. In accordance with the Forbearance Agreement dated
March 18, 1998, the bank has agreed to forbear exercising certain
remedies available to them as a result of the existence of default and
events of default until the termination date of the agreement dated June
1, 1998. Should the bank exercise its remedies under the Loan Agreement
dated June 24, 1996, the Company may be unable to continue its normal
operations. Substantially all of the Company's assets are collateral to
the bank loans.
(19) RESTRUCTURING CHARGES
During fiscal year 1998, the Company reorganized its core Lithography
business unit which resulted in $11.1 million of restructuring charges.
The Company incurred charges of $1.4 million related to severance
packages for approximately 50 employees and moving and downsizing costs
related to their manufacturing, sales and marketing, and general
administration facilities. Costs of $3.7 million were incurred to exit
certain product lines relating to the Company's newly developed lens
technology and Prober business. Additionally, charges of $6 million were
incurred to write off primarily research and development costs related
to the divested lens and Prober lines and to exit the ISIS product line
which was scheduled to be the successor of XLS, the Company's main
Stepper product line. Of the above charges, approximately $0.4 million
relating to severance is in accrued expenses, $7.2 million relating
primarily to research and development type product lines is in inventory
reserves, and $2.4 million relating to purchase commitment settlements
is in accounts payable at March 28, 1998.
23
<PAGE>
INTEGRATED SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(20) SUBSEQUENT EVENTS
On May 19, 1998, the Company signed an Asset Purchase Agreement (the
"Agreement") to sell substantially all of its assets and certain
liabilities to Ultratech Stepper, Inc. (the "Purchaser"). The provisions
of the Agreement state that the purchase price consideration of $20
million will be paid to the holders of debt (a), (b) and (c) as defined
in note 7, in full satisfaction of all amounts owed. Additionally, the
Agreement provides for holders of all short-term debt as defined in note
7 to release the Company from these liabilities. A general release to
all claims is scheduled to be signed at the anticipated closing date of
June 1, 1998. The sale is also subject to certain deliveries being made
by the Company and the Purchaser on or before the closing date.
24
<PAGE>
ITEM 7(B) PRO FORMA FINANCIAL INFORMATION
Effective June 11, 1998, Ultratech Stepper, Inc., a Delaware corporation
("Ultratech" or the "Company"), through its wholly owned subsidiary,
Ultratech Stepper East, Inc. (formerly known as Ultratech Acquisition Sub,
Inc., formerly known as Ultratech Capital, Inc.) ("Purchaser"), completed its
acquisition of substantially all of the assets and the assumption of certain
liabilities of Integrated Solutions, Inc., a Delaware corporation ("ISI") and
ISI's wholly owned subsidiary Integrated Acquisition Corp., a Delaware
corporation ("IAC"). The purchase price consisted of net cash consideration
of approximately $19.4 million and $13.7 million for transaction expenses and
assumed liabilities. The transaction was accounted for using the purchase
method of accounting; accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair market
values at the date of acquisition.
The following unaudited pro forma financial information includes pro forma
condensed combined statement of operations for the six months ended July 4,
1998 and the pro forma condensed combined statement of operations for the
fiscal year ended December 31, 1997. Ultratech's unaudited condensed
consolidated balance sheets reported in its Quarterly Report on Form 10-Q for
the three month period ended July 4, 1998 are incorporated herein by
reference.
The following pro forma financial information is not necessarily indicative
of the operating results that would have been achieved if the transaction had
occurred on the date indicated and should not be construed as representative
of future operations. The historical financial statements of ISI and its
subsidiaries are included elsewhere in this filing, and the unaudited pro
forma financial information should be read in conjunction with those
financial statements and related notes.
25
<PAGE>
ULTRATECH STEPPER, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Six Months Ended July 4, 1998
(In thousands, except per share data)
The unaudited pro forma condensed combined statement of operations
information has been prepared by combining the historical consolidated
statement of operations of the Company for the six months ended July 4, 1998
with the historical consolidated statement of operations of Integrated
Solutions, Inc. and Subsidiaries (ISI) for the period from January 1, 1998 to
June 11, 1998, the date of acquisition, and gives effect to the pro forma
adjustments as described in the notes hereto. The consolidated results of
operations of ISI for the period June 12, 1998 through July 4, 1998 are
included in the unaudited consolidated statement of operations of the Company
for the six months ended July 4, 1998. As a result of the acquisition, the
Company incurred a one-time charge in the amount of $12.6 million relating to
acquired in-process research and development. Such charge has been excluded
from the historical consolidated statement of operations of the Company
herein as it is non-recurring in nature.
<TABLE>
<CAPTION>
ULTRATECH INTEGRATED PRO FORMA PRO FORMA
STEPPER, INC. SOLUTIONS, INC. ADJUSTMENTS COMBINED
---------------- ----------------- ------------------------------------
<S> <C> <C> <C> <C>
Net sales $50,177 $ 12,212 $ 62,389
Cost of sales 32,066 14,141 (355) [a] 45,852
---------------- ----------------- -------------- ---------------
Gross profit 18,111 (1,929) 355 16,537
---------------- ----------------- -------------- ---------------
Operating expenses:
Research, development and engineering 14,014 2,419 (256) [a] 16,177
Selling, general and administrative 12,768 2,632 (215) [a]
246 [b]
(84) [c] 15,347
Acquired in-process research and development 12,566 12,566 [h] -
Restructuring - 4,502 4,502
Royalty - 84 (84) [d] -
---------------- ----------------- -------------- ---------------
39,348 9,637 (12,959) 36,026
---------------- ----------------- -------------- ---------------
Operating income/ (loss) (21,237) (11,566) 13,314 (19,489)
Interest expense 109 1,604 (1,604) [e] 109
Other income/ (expense), net 3,295 (121) (333) [f] 2,841
---------------- ----------------- -------------- ---------------
Income/ (loss) before income taxes (18,051) (13,291) 14,585 (16,757)
---------------- ----------------- -------------- ---------------
Provision for (benefit from) income taxes (3,048) (1,475) 707 [g] (3,816)
---------------- ----------------- -------------- ---------------
Net income/(loss) from continuing operations $(15,003) $(11,816) $13,878 $(12,941)
---------------- ----------------- -------------- ---------------
---------------- ----------------- -------------- ---------------
Net income (loss) per share from continuing
operations - basic ($0.72) ($0.62)
Number of shares used in per share
computations - basic 20,864 20,864
Net income (loss) per share from continuing
operations - diluted ($0.72) ($0.62)
Number of shares used in per share
computations - diluted 20,864 20,864
</TABLE>
26
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Six Months Ended July 4, 1998
PRO FORMA BASIS OF PRESENTATION
The pro forma information presented is not necessarily indicative of the
future consolidated results of operations of the combined company or the
consolidated results of operations which would have resulted had the
Company's acquisition of Integrated Solutions, Inc. and Subsidiaries (ISI)
taken place during the period presented. The unaudited pro forma combined
condensed statement of operations reflects the effects of the acquisition of
ISI, assuming the acquisition and related events occurred as of January 1,
1998.
The unaudited consolidated statement of operations of the Company for the six
months ended July 4, 1998, has been combined with the ISI unaudited
consolidated statement of operations for the period from January 1, 1998
through June 11, 1998, the date of acquisition. The unaudited consolidated
results of operations of ISI for the period June 12, 1998 through July 4,
1998 have been included in the unaudited consolidated results of operations
of the Company. The unaudited pro forma condensed combined statement of
operations gives effect to the following pro forma adjustments:
(a) Represents the depreciation expense of property, plant and equipment
acquired from ISI, net of the effect of depreciation reduction based on
the new basis in the acquired property, plant and equipment, and assuming
an estimated average useful life of five years.
(b) Represents the amortization of goodwill related to the acquisition of ISI
over a five year period, reflecting an estimate of the useful life of the
intangible.
(c) Represents the elimination of amortization of intangibles of ISI that were
acquired by the Company, based on the actual amortization expense
recognized.
(d) Represents the elimination of royalty expense of ISI, based on the actual
amortization expense recognized.
(e) Represents the elimination of interest expense for the six months ended
July 4, 1998 for certain notes payable of ISI that were paid down as part
of the ISI acquisition and certain long-term debt which were not assumed
in the acquisition, which would not have been incurred for the fiscal year
had the acquisition had been consummated as of January 1, 1998.
(f) Represents the reduction in interest income earned by the Company for the
six months ended July 4, 1998 on cash in the amount of the consideration
paid for the acquisition of ISI that would not have been earned had the
acquisition been consummated as of January 1, 1998.
(g) Adjustment to reflect income tax effects, assuming a combined state and
federal effective income tax rate of 35%.
(h) To eliminate the charge for acquired in-process research and development
related to the acquisition.
27
<PAGE>
ULTRATECH STEPPER, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31, 1997
(In thousands, except per share data)
The unaudited pro forma condensed combined statement of operations
information has been prepared by combining the historical consolidated
statement of operations of the Company for the fiscal year ended December 31,
1997 with the historical consolidated statement of operations of Integrated
Solutions, Inc. and Subsidiaries (ISI) for the fiscal year ended March 28,
1998, and gives effect to the pro forma adjustments as described in the notes
hereto.
<TABLE>
<CAPTION>
ULTRATECH INTEGRATED PRO FORMA PRO FORMA
STEPPER, INC. SOLUTIONS, INC. ADJUSTMENTS COMBINED
----------------- ---------------- -----------------------------------
<S> <C> <C> <C> <C>
Net sales $147,349 $ 40,176 (767) $187,525
Cost of sales 69,671 35,025 [a] 103,929
----------------- ---------------- ---------------- ---------------
Gross profit 77,678 5,151 767 83,596
----------------- ---------------- ---------------- ---------------
Operating expenses:
Research, development and engineering 26,431 5,917 (543) [a] 31,805
Selling, general and administrative 26,177 6,262 (463) [a]
550 [b]
(189) [c] 32,337
Acquired in- process research & development 3,619 - 3,619
Special charge relating to termination
of Japan distributor 3,450 - 3,450
Restructuring - 11,132 11,132
Royalty - 640 (640) [d] -
----------------- ---------------- ---------------- ---------------
59,677 23,951 (1,285) 82,343
----------------- ---------------- ---------------- ---------------
Operating income/ (loss) 18,001 (18,800) 2,052 1,253
Interest expense 165 3,283 (3,283) [e] 165
Other income/ (expense), net 7,258 (82) (750) [f] 6,426
----------------- ---------------- ---------------- ---------------
Income/ (loss) before income taxes 25,094 (22,165) 4,585 7,514
Provision for (benefit from) income taxes 7,528 (2,753) 1,605 [g] 6,380
----------------- ---------------- ---------------- ---------------
Net income/(loss) from continuing operations $ 17,566 $ (19,412) $ 2,980 $ 1,134
----------------- ---------------- ---------------- ---------------
----------------- ---------------- ---------------- ---------------
Net income per share from continuing
operations - basic $ 0.85 $ 0.06
Number of shares used in per share
computations - basic 20,553 20,553
Net income per share from continuing
operations - diluted $ 0.81 $ 0.05
Number of shares used in per share
computations - diluted 21,681 21,681
</TABLE>
28
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31, 1997
PRO FORMA BASIS OF PRESENTATION
The pro forma information presented is not necessarily indicative of the
future consolidated results of operations of the combined company or the
consolidated results of operations which would have resulted had the
Company's acquisition of Integrated Solutions, Inc. and Subsidiaries (ISI)
taken place during the period presented. The unaudited pro forma combined
condensed statement of operations reflects the effects of the acquisition of
ISI, assuming the acquisition and related events occurred as of January 1,
1997.
The consolidated statement of operations of the Company for the year ended
December 31, 1997, has been combined with the ISI consolidated statement of
operations for the year ended March 28, 1998. The unaudited pro forma
condensed combined statement of operations gives effect to the following pro
forma adjustments:
(a) Represents the depreciation expense of property, plant and equipment
acquired from ISI, net of the effect of depreciation reduction based on
the new basis in the acquired property, plant and equipment, and assuming
an estimated average useful life of five years.
(b) Represents the amortization of goodwill related to the acquisition of ISI
over a five year period, reflecting an estimate of the useful life of the
intangible.
(c) Represents the elimination of amortization of intangibles of ISI that
were acquired by the Company, based on the actual amortization expense
recognized during the fiscal year ended March 28, 1998.
(d) Represents the elimination of royalty expense of ISI, based on the actual
amortization expense recognized during the fiscal year ended March 28,
1998.
(e) Represents the elimination of interest expense for the fiscal year ended
March 31, 1998 for certain notes payable of ISI that were paid down as
part of the ISI acquisition and certain long-term debt which were not
assumed in the acquisition, which would not have been incurred for the
fiscal year had the acquisition had been consummated as of January 1,
1997.
(f) Represents the reduction in interest income earned by the Company for the
year ended December 31, 1997 on cash in the amount of the consideration
paid for the acquisition of ISI that would not have been earned had the
acquisition been consummated as of January 1, 1997.
(g) Adjustment to reflect income tax effects, assuming a combined state and
federal effective income tax rate of 35%.
29
